The following invention relates to compliance systems and, in particular, to a system for implementing a compliance program in a geographically-dispersed financial institution.
United States securities laws and the laws of other nations make it unlawful, in some circumstances, for a person who possesses non-public, material information about an issuer (“inside information”) of publicly traded securities to trade in the securities without disclosing the information to the counterparty, or to “tip” others to the information. Broker dealers that engage in investment banking including both public underwriting and financial advice to public companies in mergers and acquisitions transactions often receive inside information. As a result they would be disabled from proprietary trading, including market making, publishing research, giving investment recommendations and managing money unless there were an effective way to prevent those engaged in those activities from learning about the inside information, as well as legal recognition of such policies and procedures to prevent attribution of the inside information to the broker dealer's traders, research analysts, portfolio manager and sales personnel even in the absence of such actual knowledge.
The enactment of the Insider Trading and Securities Fraud Enforcement Act (“ITSFEA”) in 1988 strengthened the Securities and Exchange Commission's (“SEC”) enforcement powers over insider trading and created an explicit duty for U.S. brokers dealers to establish, maintain and enforce procedures designed to control the flow on inside information. Neither the SEC nor the self regulatory organization's have promulgated regulations specifying the policies and procedures that will be deemed adequate in connection with the misuse of inside information. However, the SEC has identified several “minimum elements” necessary for the establishment of adequate procedures. Specifically, broker dealers must, among others things, (i) review customer, employee and proprietary trading through effective maintenance of some combination of watch and restricted lists, (ii) maintain a substantial Compliance Department control over relevant interdepartmental communications, and (iii) conduct heightened reviews when a firm possesses inside information.
In implementing the required policies and procedures broker dealers typically maintain a list, sometimes called a Grey List or Watch List, that includes all companies about which employees of the financial institution (for example, bankers) have knowledge of material non-public information. New companies are added to the Grey List when financial institution employees become privy to material non-public information regarding such companies. In order to add a company to the Grey List, a banker typically calls a compliance officer of the financial institution indicating that the broker dealer has, or is likely to possess inside information regarding a particular company. The Compliance Department gathers the relevant information and places the company on the Grey List in which case the employees that are involved in advising the company are restricted from trading in the stock of the company. Furthermore, the broker dealer monitors the transactions of its employees and proprietary traders in the given company in order to detect potential misuse of the information.
In certain cases, when a financial institution's professional involvement with a company is made public, trading restrictions are imposed. For example, if the financial institution is advising Company A in its attempt to acquire Company B and the information has been made public, employees generally are restricted from trading the stock of Company A and Company B as well as engaging in any other investment or advisory activities that creates an appearance of impropriety. In addition, restrictions on proprietary trading and customer solicitation also may be imposed.
The prior art processes for managing the compliance obligations of financial institutions typically include a compliance officer of the institution that receiving from the institution's bankers information regarding the bankers' advising activities with respect to particular companies. Based on the nature of these activities and the status of any transactions contemplated by the bankers' clients, the compliance officer then places the particular companies on the Grey List, the Restricted List or no list altogether. If a particular company is placed on either the Grey List or Restricted List, then the compliance officer also includes details of the contemplated transaction such as expected timing of the deal, the composition of the deal team, the details of the transaction, etc.
Certain employees of many broker dealers are required by firm policy to pre-clear personal securities transactions. The employee must interact with the compliance officer to determine whether the trade includes a company on either the Grey List or Restricted List. If the trade includes a company on the Restricted List, then the compliance officer indicates to the employee that the employee is prohibited from making the contemplated trade. If the trade includes a company on the Grey List, then the compliance officer will generally not prohibit the trade unless the inquiring employee is directly involved in advising the company and therefore would be in the position of knowing material non-public information regarding the company.
In addition to pre-clearing trades, the prior art compliance processes also include monitoring the trading activity of employees throughout the institution for each company on the Grey List. If the compliance officer notices an increase in trading activity in any of the companies on the Grey List, then the compliance officer may initiate an investigation to determine whether the trading activity is a result of improper use of any material non-public information.
The prior art processes used by financial institutions for monitoring trading activities for compliance with insider trader regulations have numerous shortcomings. First, the process of pre-clearing a trade typically requires the compliance officer to individually review each trade request received from employees to determine if any of the underlying companies are on the Grey List or Restricted List. This is a manually intensive and slow process resulting in two problems for financial institutions. First, this requires that financial institutions allocate scarce and precious compliance resources to a purely ministerial function, precluding the opportunity to apply those resources against higher level compliance services. Second, employees desiring to execute trades may not receive clearance in time to execute the trade at a favorable price. This problem is further exacerbated in fast-paced financial markets when waiting for a compliance officer to approve a trade is unacceptable. Maintaining a compliance program in globally dispersed financial institutions is even more problematic because of the difficulty in providing employees a trade pre-clearance that may depend on updates to the Grey List and/or Restricted List that originates several time zones away. The inability of the prior art compliance processes to efficiently manage the Grey List and Restricted List in a global context may result, for example, in a Japanese employee executing a trade in the stock of a particular company that a New York-based banker is advising because the Restricted List has not yet been updated by the New York compliance officer who may not be available to otherwise pre-clear the trade during Japanese trading hours. Because the prior art compliance processes are inefficient and often ineffective at spotting Grey List and Restricted List trading violations, a financial institution may be subject to substantial fines for its inability to monitor and prevent trades that violate insider trading regulations.
Accordingly, it is desirable to provide a system for implementing a compliance program in a geographically-dispersed financial institution.